The strict “COVID zero” policy was among the key factors impeding China’s growth recovery this year. Recently, however, the Chinese government announced its “20 optimizing measures on COVID policy,” fueling a sharp Chinese market rally. While these measures don’t suggest immediate reopening, they may mark the beginning of the end for cumbersome lockdowns.

Airline passenger traffic
Normalized to 100 at January 1, 2020, January 2010 - August 2022

Line graph of airline passenger traffic in China, Japan and the U.S. from 2010 to Dec. 2022, showing a dramatic fall for all in 2020 with hardly any recovery from China.

Bloomberg, Principal Asset Management. Data as of November 18, 2022.

In the first week of November, speculation that China’s strict COVID policies would be relaxed triggered a spectacular 13% rally in MSCI China. The official announcement of “20 optimizing measures on COVID policy” that followed, which addresses the pain points of China’s COVID policy and promotes moves that will likely lead to full reopening, immediately lifted China equities into bull market territory.

The euphoric market response is unsurprising. Highly infectious new strains have rendered China’s once effective “COVID zero” policy extremely costly to maintain. Frequent lockdowns haven’t just deterred consumption activity (airline passenger traffic, for example, has yet to return), but also restricted the impact of stimulus on infrastructure investments, in turn worsening the property downturn.

The gradual removal of restrictions would open the door for more effective fiscal stimulus, further restoring market confidence. Yet, there are still challenges to overcome:

  • New vaccines need to be developed and vaccination rates must increase significantly.
  • Case counts are already elevated, and looser COVID restrictions could lead to another surge in infections.
  • Implementation risks remain as local governments often enforce stricter restrictions than national guidelines recommend.

China’s latest decision to reconnect with the world is extremely growth positive. As ever though, investors should cautiously monitor developments as faithful execution of the reopening plan will be key to the investment outlook.


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